Wrong handling of user data may cost up to $5B for Facebook

Facebook said Wednesday it expects to shell out between $3 billion and $5 billion to settle the FTC’s ongoing investigation into its handling of user data, foreshadowing a potentially massive penalty from the nation’s top consumer protection agency.

The company said it set aside $3 billion during the first quarter to handle the expected expense, though it insisted the “matter remains unresolved.” It’s not clear when the investigation, triggered by reports that Cambridge Analytica improperly obtained Facebook user data, would come to an end, Facebook said.

A settlement of that size — unprecedented for the FTC — would be a striking hit to the social networking giant’s global reputation and a clear sign that U.S. regulators are no longer cowed by the Silicon Valley behemoth.

Still, even with the money set aside, Facebook posted a profit of $2.4 billion for the first quarter, showing the enduring power of its advertising-driven business model. Investors appeared to initially shrug off the news of the anticipated penalty, with the company’s shares up in after-hours trading.

A $3 billion to $5 billion settlement would dwarf the FTC’s largest penalty to date against a tech company over privacy: a $22.5 million settlement with Google in 2012. And it would put U.S. regulators, for the first time, in the same ballpark as European Union officials, who’ve levied billions of dollars in fines against Google, for example.

While Facebook previewed the amount of cash it may have to hand over, the company shed no light on possible conditions the FTC could impose as part of a settlement — from restrictions on the company’s future data collection practices to changes to the company’s executive leadership. Such conditions, if they come to pass, could have a deeper long-term impact on Facebook’s bottom line.

Facebook CEO Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg didn’t mention the potential FTC settlement during a conference call with investors Wednesday. When asked about the issue, the company’s chief financial officer, David Wehner, declined to elaborate, saying the investigation is ongoing.

The FTC declined to comment.

The agency’s probe began last spring after reports that political data firm Cambridge Analytica, which did work for President Donald Trump’s 2016 campaign, got its hands on information on some 50 million Facebook users via an academic researcher. That number was later revised upward to as many 87 million affected users.

The controversy raised new questions about Facebook’s privacy controls, as details emerged that the social network had known about the issue since 2015 and had failed to verify that Cambridge Analytica deleted the data once the violation was discovered.

The scandal has remained a persistent problem for Facebook. The FTC as well as the Justice Department, FBI and SEC have all directed questions at the company about the data controversy. In the UK, Facebook was fined £500,000 for failing to protect people’s online data connected to Cambridge Analytica.

At issue for the FTC is a consent decree the agency signed with Facebook in 2011, requiring the company to give consumers clear notice and obtain their expressly stated consent before sharing their information with outside parties. That settlement, which followed a series of Facebook missteps like making user friend lists public without notification, imposed restrictions over the social network’s privacy practices for 20 years.

Cambridge Analytica, which denied wrongdoing in the Facebook scandal, closed down last May. The firm touted its use of “psychographics,” in which huge troves of data are collected to microtarget potential voters based on personality traits. The operation had strong ties to team Trump. GOP megadonor Robert Mercer, a major backer of Trump’s campaign, provided funding for Cambridge Analytica, and Steve Bannon, who went on to be Trump’s campaign CEO and chief White House strategist, served on its board.

Facebook faces scrutiny over a cascade of other privacy mishaps over the past year. Researchers this month revealed hundreds of millions of records on the social network’s users were left unprotected on Amazon’s cloud servers. Facebook disclosed in March that it had insecurely stored hundreds of millions of user passwords. And The Wall Street Journal reported in February that a slew of well-being apps shared sensitive user data with the company.

The company has taken a number of steps in the wake of the Cambridge Analytica controversy, including suspending 200 apps as part of a post-scandal audit. It later cut off access for hundreds of thousands of inactive apps that had not submitted themselves for the review process. The moves are part of a broader set of Facebook policy changes — including new transparency requirements for political ads — adopted in the wake of the 2016 election.

Some Facebook critics quickly dismissed a multibillion-dollar penalty against the company as insufficient. Rep. David Cicilline (D-R.I.), chairman of the House Judiciary Antitrust, Commercial and Administrative Law Subcommittee, said Wall Street’s indifference to the news is proof that it would be a “slap on the wrist.” Marc Rotenberg, president of Electronic Privacy Information Center, called on the FTC to pursue other punishments, including changes to management and hiring practices, and the divestiture of WhatsApp and Instagram.

The privacy flareups are just one facet of Facebook’s deepening problems in Washington. Democrats have accused the company of not doing enough to combat Russian election interference, following revelations that Kremlin-linked trolls used the social network to inflame social and political tensions in the U.S. during the 2016 campaign and promote Trump over Democrat Hillary Clinton.

Trump and Republicans, meanwhile, have ramped up accusations that Facebook and its fellow social media companies are biased against conservatives in the way they manage content — something the companies strongly deny. Facebook also faces frequent criticism for not taking down hoaxes and conspiracy theories.

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